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Family Firm Governance!

In you're a member of a family business, the recent Saucier Joint Report on Corporate Governance released in April 2001 inadvertently offers the perfect recommendation to foment civil war.

First, it says, hire outside directors. So far, so good. Then, for boards with a majority of outsiders, it suggests the outsiders have a separate (read: secret) meeting without management and then report back to the chair (read: owner) with their decisions.

Certainly, if the family is fighting and contaminating the daily operation of the firm, secret meetings are often the norm, but there is certainly no report.

For most family firms, the idea of a board meeting without the owner (or owners) is tantamount to treason. Family decision-making is much more collaborative – or it is the exclusive domain of the founder. Seldom will family businesses tolerate this separate structure.

That's just one example of why good governance for widely held corporations is not the same thing as good governance for family business.

Guylaine Saucier's committee on corporate governance – a creature of the Canadian Institute of Chartered Accountants, the Canadian Venture Exchange and the Toronto Stock Exchange – issues recommendations appropriate for Corporate Canada but entirely neglects the entirely different circumstances of Family Firm Canada. Strangely, the Toronto Stock Exchange's 1994 Dey Report on corporate governance did the same thing.

It's not like family firms are small potatoes: 30% of the Report on Business and Fortune 500 are family-owned or family-controlled businesses. They're also the heart of entrepreneurship, the engine of employment and economic growth. And it's a fact that family firms with effective governance perform better over the long haul.

From a family business perspective, at least the Saucier report is right about the need for an independent board of directors – but not one that operates like a corporate board. Governance for the family business goes a step further, recognizing three pillars of management, ownership and family.

An independent board addresses management, but the Saucier report glosses over the pivotal role of ownership and significant shareholders, a minor issue for corporations but a key consideration for the business family.

And ownership in the family business is inextricably tied up with family. The family is the shareholders and they have the power to help or sink the operation. Even minority shareholders can eventually scuttle the ship at the second- or third-generation stages.

In family businesses, shareholder rights and obligations – roles and responsibilities – must be defined. Everyone needs a voice. That's why family businesses need an owners' forum (for the shareholders) and a family council (for all family members) as well as an independent board.

This may sound like a recipe for stalemate, but it's not. In fact, the starting point is often the formation of the independent board of directors that brings accountability, planning, communication, decision-making and the sharing of information to the family firm.

Many family firms have not yet taken this crucial step. The 1998 Pervin survey showed that only about 46% of family businesses have a board, and 70% of these have only family and insider representation. Outsiders are strangers and the business family does not easily trust them – even if it still values independent advice.

Nevertheless, the 1998 survey confirmed that business families are making progress. They're appointing more boards and other governance systems, and meeting more frequently with them.

In practice, what this means is that they are abandoning the classic entrepreneurial under-one-thumb business model. Instead, they're allowing for separate decision-making in the business, the family and the ownership group.

Most of the momentum for change toward more transparent governance comes from the "next generation" of owners, the second- and third-generation shareholders who are searching for a better way to run their companies and develop their inheritance.

One way they do this is by meeting in the owners' forum and the family council to work out statements of a partnership vision, mission, values and philosophies of operation. They share this "family creed" with the board and the board develops a charter that matches their intentions for the operation and governance of the firm.

This way, the company stands on three strong – but separate – pillars of management, ownership and family pride or "legacy".

All this talk of boards, meetings, creeds and charters could leave one with the impression that every family firm that embraces effective governance will thrive. This is far from accurate.

Structures and systems will never replace good family relationships. Family firms must first succeed on the relationship level. And, it's the difficulty of maintaining this delicate balance with ownership, management and the family legacy that drives home the point that family firm governance needs far more attention than it's getting.

ALL ARTICLES PERVIN FAMILY BUSINESS ADVISORS INC.

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